Frank J. Buchman

Cowboy • Horseman • Writer

How To Save Money This Fall Despite High Interest Rates

The field wasn’t the only place on the farm feeling the heat this summer. Rising interest rates have added pressure to the farm balance sheet.

Still, purchasing has remained resilient, according to various ag finance representatives. They offer tips to help farmers save money this fall.

Interest rates have been increasing since early last year when the U.S. Federal Reserve began upping the federal funds rate. It has increased the federal funds rate 11 times in 19 months for a total increase of 5.25 percentage points.

A foolproof way to avoid interest rates altogether is to pay cash.

Tim Kocha at Farm Credit Services of America said the agricultural lender has seen less loan activity in the past 18 months than expected.

“Because of the higher interest rate environment, we are seeing an increased volume of cash used as part of the purchase,” he said.

In fact, Koch said the market for agricultural land has remained stronger than expected as interest rates have increased.

“Typically, when rates went up like they did, you would see real estate values decline, or at least be flat,” he said. “In the last 18 months, real estate prices have increased.”

Koch said that’s because the people buying ag real estate now aren’t as sensitive to the increase in interest rates. He attributes that to three reasons.

The buyers are either using a significant amount of cash for those purchases. They have a low level of debt on the other real estate they own, or any debt they have is locked in at low rates.

Between high commodity prices and government support payments, a strong amount of cash has permeated the market in recent years, experts said.

However, Paul Schadegg, Farmers National Company, said as cash reserves run low, farmers will feel the impact of interest rates more.

“With that, many purchases made may be leveraged,” he said. “When they’re leveraged, which the Midwestern banks are telling us they’re seeing an increase in loan activity, then we go back to the profitability question.

“If you’re leveraging the land, you’ve just added an expense of interest. That is going to be an obstacle for any individual or group that is purchasing land moving forward.”

Koch said in those instances where financing is needed, today’s interest rate environment doesn’t have to be a deterrent if the overall financial picture of the farm is strong.

“Our tried-and-true answer is to understand the impact of additional debt on your total cost of production,” he said.

John Maman at Nutrien Financial said it’s also important to stay in communication with trusted advisers about an agronomic and economic plan for the year.

“There’s the old adage, ‘It takes a village to raise a family,’ and in a small market like agriculture, it is a family-like atmosphere with those that you depend on,” Maman said.

He encouraged growers to plan for 2024 and then continue evaluating and adjusting throughout the year.

“I think it really starts with looking at early opportunities to capitalize on the fall fertilizer market and fall input market,” Maman said.

In preparation for the new year, there may be opportunities to lock in lower rates.

“This is an option for them to still be able to make those decisions and plan for the next year, but not have it be such a hit to their balance sheet,” said Daniel English at FBN Finance.

Promotional rates may also exist on the equipment side of the industry. John Deere Financial, for example, is offering rates as low as zero percent for parts, service, and crop inputs.

English suggested talking with a financial adviser to learn about all financing options and how to best utilize existing assets. He also recommended shopping around for inputs and operating lines.

“If you’ve been with the same local bank for 20 or 30 years, maybe they’re giving you a great deal because of the relationship. But they may also have not had to compete for [your business] before,” he said. “Make sure that you get a second opinion as to what your rate should be.”

While today’s interest rates are high in comparison to recent years, finance professionals agree today’s rates are “historically normal.” Maman said there is potential for another rate increase before the end of the year.

“It is unlikely that we’re going to see those historically low levels anytime soon,” Koch said.

“Now, I’m not saying that we won’t drift back down to the 6 percent to 6.5 percent range, but a large majority of our existing portfolio repriced their loans at 3.5 percent to 4.5 percent prior to when the Federal Reserve began increasing rates. I think those days are probably behind us.”

English said how much rates have gone up and the rate at which they went up caused some initial “sticker shock” with customers, but they are adjusting to the current rates.

“The farmers we work with are realists,” English said. “They know where it’s at and are ready to figure out how to make it work and move on to what they typically love to do, which is farming, not talking about interest rates.”


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